BIR Ruling No. 187-13

May 20, 2013 BIR RULING NO. 187-13 Section 36 (B) (6) (b) of the Tax Code of 1997, as amended; and Section 2.78.1 (A) (3) (a) and (A) (7) and of Revenue Regulations No. 2-98; BIR Ruling No. 481-12; and BIR Ruling No. 199-11 SNP Steel Corporation Block 4, Lot 11-A, First Cavite Industrial Estate, Bario Langkaan 2, Dasmarias, Cavite Attention: Shogo Aoki President Gentlemen : This refers to your letter dated 14 May 2012 requesting for a confirmatory ruling to the effect that the severance pay of your employees are exempted from payment of taxes pursuant to Revenue Memorandum Order No. 26-2011 dated 13 June 2011. It is represented that SUMINAC PHILIPPINES, INC. (SPI) merged with SNP STEEL CORPORATION (SNP), with SPI as the surviving Corporation. The Articles and Plan of Merger executed on March 9, 2012 by the aforementioned parties were duly approved by the Securities and Exchange Commission (SEC) on April 25, 2012. Pursuant to the Articles and Plan of Merger, SNP will cease operation along with the services of its employees. On April 26, 2012, SNP notified the Provincial Office of the Department of Labor and Employment Region IV-A of the cessation of operation and termination of its employees pursuant to the Plan of Merger. The affected employees are the following: SIHCDA Name Years of Service Status 1. Alexander Ojeda Atienza 13yrs. & 5mos. Regular 2. Romeo Rodriguez Avestruz 6yrs. & 5mos. Regular 3. Allan Rascano Balite 11yrs. & 3mos. Regular 4. Vener Aguillar Beltran 7yrs. & 1mo. Regular 5. Romeo Gemao Cabacas 10yrs. & 1mo. Regular 6. Miguelito Castillo Delos Reyes 3yrs. & 10mos. Regular 7. Jessie Pelle Digo 10mos. Regular 8. Roel Maragat Dulce 15yrs. & 1mo. Regular 9. Norberto Merced Hernandez 14yrs. & 6mos. Regular 10. Jennylyn Cortez Medina 1yr. & 2mos. Regular 11. Elmer Borromeo Reyes 11yrs. & 3mos. Regular 12. Erwin Tores Tores 15yrs. & 1mo. Regular 13. Johnny Trajano 11yrs. & 4mos. Regular 14. Crisboy Catibog Angon - Probationary 15. Ronnel Cawin Nolasco - Probationary 16. Sharisse Marabulas Dacuan - Probationary 17. Karen Subang - Probationary In reply, please be informed that pursuant to Section 32 (B) (6) (b) of the Tax Code of 1997, any amount received by an official or employee or by his heirs from the employer as a consequence of separation of such official or employee from the service of the employer because of death, sickness or other physical disability or for any cause beyond the control of said official or employee is exempt from taxes regardless of age or length of service. The phrase "for any cause beyond the control of said official or employee" connotes involuntariness on the part of the official or employee. The separation from the service of the official or employee must not be asked or initiated by him. The above-mentioned provision requires the presence of two (2) conditions in order that the benefits may be granted tax exemption, namely (1) the official or employee is separated from the service of the employer due to death, sickness or other physical disability, or for any cause beyond the control of the said official or employee; and (2) the official or employee or his heirs receives any amount from the employer on account of such separation. As noted, the employees' separation from employment was due to the merger of SPI and SNP. Accordingly, where the employee is separated involuntarily from the service due to a cause beyond his control, the separation benefits received by them as a result thereof are exempt from income tax and consequently from withholding tax prescribed by Section 79 of the Tax Code of 1997 and as implemented by Revenue Regulations No. 2-98, as amended. (BIR Ruling No. 481-2012 dated July 30, 2012) cIADaC Accordingly, no withholding taxes shall be deducted from the separation benefits and the entire amount thereof shall be given to the separated employees. Moreover, pursuant to Section 2.78.1 (A) (7) of RR 2-98, as amended, the terminal pay, i.e. , commutation and payment of monetized unsued vacation leave credits not exceeding ten (10) days during the year are not subject to income tax and consequently to the withholding tax. Conversely, the cash equivalent of vacation leave exceeding ten (10) days is subject to tax. However, this same principle cannot apply to SICK leave credits since an employee must actually go on sick leave to be able to avail of said leave credits. It is, however, understood that this exemption does not include the payment to the employee of their salaries and the payment of the 13th month pay and other benefits in excess of Php30,000 threshold under Section 2.78.1 (A) (3) (a) and (A) (7) of RR 2-98, as amended. (BIR Ruling No. 199-2011 dated June 29, 2011) This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered as null and void. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue